Buying a Car? How Much Is the Tax?

How are sales taxes for cars calculated and are they the same if you buy a new or used vehicle? Does it make a difference in tax if you trade-in and buy a different vehicle? Jean Scheid, owner of a Ford dealership in New Mexico explains.

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Understanding the Tax

No matter what state you live in, when you purchase a new or used automobile, you will have to pay auto sales tax. The taxes you pay on that vehicle are usually paid by the dealership or used car lot where you bought the vehicle, paid to the motor vehicle department, and stated on your buyer's order. Once paid, you will receive your registration documents and new license plate or a new license plate expiration sticker. Some wonder if auto dealers charge excess amounts for tax or if it's better to go to your motor vehicle department and pay them on your own. While you have that choice, auto dealerships and used car lots are not allowed to overcharge you this type of tax.

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Cost of Car

As much as we'd like to hope, we do have to pay and be responsible for sale taxes, even taxes on vehicle purchases. If you're unsure how these taxes work, here's a simple breakdown:

Check with MVD - Before you buy a new or used vehicle, check with your motor vehicle department (MVD) and inquire how much sales taxes are in your state. Each state charges at least three percent but some states are as high as seven percent. Once you're armed with your state's tax, start auto shopping.

New or Used Car Purchase - If you buy a new or used car from a dealership or used car lot, you will have to pay sales tax. For example, if you purchase a new car for $25,000, multiply your state's sales tax amount to find out how much you will owe to the motor vehicle department. If your state charges three percent, your tax would be $750, as long as no trade-in was involved in your purchase. Sales tax is the same for both new and used vehicle and is based on the purchase price of the vehicle or what you paid for the car.

Got a Trade-In? - If you have a trade-in when you purchase a new or used vehicle, your tax will change. Most car shoppers are happy to know that if you do have a trade-in, the amount of sales tax you will owe goes down. For example, if you purchase that same new or used car for $25,000 and the value of your trade-in is $10,000, your trade-in value is deducted from the $25,000 so you only pay three percent on $15,000 or $450.

Trade-in Value - Keep in mind that your trade-in value, as far as your motor vehicle department is concerned is what the dealership or used car lot gave you for that trade-in (trade-in allowance). It is not the actual cash value of your trade-in.

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Tips For Paying

There are some tips to keep in mind on new or used vehicle taxes:

Finance It - You can opt to finance your auto taxes in your finance contract. When you do this, the bank, credit union, dealership or used car lot where you financed the vehicle will pay the tax.

Paying Cash - If you write a check for a new or used car at a dealership or used car lot, that amount you owe will include the sales tax and appear on your buyer's order. The dealership or used car lot usually is permitted only thirty days to pay that tax. If they go beyond that period, a late fee is due and you won't receive your permanent license plate or registration documents.

Pay It On Your Own - If you write a check for your new or used vehicle, you can still opt to pay the tax to the motor vehicle department on your own. Simply ask the dealership or used car lot to give you a buyer's order showing what you paid for the vehicle, less your trade-in allowance. Next take it to your motor vehicle department and pay your tax directly. The dealership or used car lot will also give you the title for the vehicle to take with you. Keep in mind that if you finance or lease your vehicle, because you have a lienholder (bank, credit union or finance company), that lienholder will usually require the dealership or used car lot pay the vehicle tax for you to ensure it gets paid and the lienholder information is correct.

Make Sure It Gets Paid - Whether you pay vehicle tax on your own or the car dealership or used car lot pays it for you, make sure it gets paid. Before you car shop, check with your motor vehicle department or taxation and revenue department and inquire if any used car lots or auto dealerships are delinquent in paying sales taxes. If they are, skip those places and find a trustworthy dealership or used car lot that will pay your tax on time.